For much of the past year, the outlook for borrowers appeared to be improving. Inflation has been rising more slowly, financial markets were beginning to price in interest rate cuts, and many small businesses expected the cost of borrowing to gradually ease through 2026. Unfortunately, that landscape is now changing.
A surge in global energy prices linked to escalating tensions involving Israel, USA, Iran, and other middle-eastern actors has forced financial markets to reassess inflation risks. As a result, expectations for Bank of England rate cuts have shifted dramatically. Markets that previously anticipated multiple reductions are now increasingly preparing for a prolonged period of higher rates, and potentially even an increase.
For businesses planning to raise capital, this change in sentiment matters a lot. Borrowing costs are not determined solely by official interest rate decisions. They respond quickly to market expectations, and lenders often adjust pricing well before central banks act, especially alternative lenders that most smaller businesses only have access to.
The latest movements across mortgage markets, swap rates and lender pricing all suggest the same thing: the window for cheaper borrowing may be narrowing again.
A Global Shock Re-enters the Inflation Story
Energy markets sit at the centre of the current shift. The conflict in West Asia has pushed oil prices towards multi-year highs amid concerns about disruptions to global energy supply routes, particularly around the Strait of Hormuz. For economies like the UK, which remain sensitive to imported energy costs, this creates renewed inflation pressure.
Recent forecasts already reflect this concern. The British Chambers of Commerce now expects UK inflation to reach approximately 2.7% by the end of the year, higher than earlier projections.
That change may appear modest, but central banks respond aggressively to even small shifts in inflation expectations. Higher inflation risks reduce the likelihood of interest rate cuts and increase the probability that monetary policy remains restrictive for longer.
Only weeks ago, financial markets believed there was roughly an 80% chance the Bank of England would cut rates at its next meeting. That probability has now dropped to around 20%.
Some economic forecasters have gone further, suggesting the base rate could rise above 4% by the end of the year, up from the current 3.75%, if energy prices remain elevated.
The message for businesses is clear: the era of borrowing cost reduction has been interrupted.
Mortgage Markets React First, and They Have
When interest rate expectations change, the first visible reaction almost always appears in mortgage pricing.
Mortgage lenders rely heavily on swap markets to price fixed-rate loans. When swap rates rise, mortgage rates follow. Recent data illustrates how quickly that adjustment can occur.
The average UK mortgage rate has now climbed above 5%, with two-year fixed rates averaging 5.01% and five-year fixes reaching 5.09%. At the same time, lenders have withdrawn hundreds of mortgage products from the market while they reprice their offerings.
In just two days, 472 residential mortgage deals were removed, representing roughly 6.5% of the available market.
Such withdrawals are rarely administrative. They typically signal that lenders expect the cost of funding to increase and need time to adjust pricing. For borrowers, this is an early indication that financing conditions are tightening again. This also serves as an important reminder for anyone planning to borrow: until the funds have actually been drawn down, the terms are not guaranteed.
We’ve arranged financing many times where clients assume an offer will remain available indefinitely, or that a lender won’t adjust pricing once an offer is issued. In reality, lenders can and do change terms or withdraw products as market conditions shift.
Recent movements in the mortgage market are a clear example of how quickly that can happen.
Lenders Are Already Moving
The repricing process has already begun among major lenders.
NatWest recently increased rates across its residential and buy-to-let mortgage ranges, raising some products by as much as 0.18%. The changes followed a rapid rise in swap rates, which moved significantly higher in early March as markets reacted to the geopolitical situation.
NatWest is not alone. Several major lenders, including HSBC, Nationwide, Santander and Coventry Building Society have also increased selected mortgage rates.
This reflects a fundamental truth about lending markets: rates are forward-looking.
Banks price loans based on expectations about future funding costs, not just current base rates. If markets believe borrowing costs may rise later in the year, lenders will begin adjusting prices immediately.
For businesses, that means the cost of borrowing can increase well before the Bank of England formally changes policy.
Borrower Demand Remains Surprisingly Strong
Despite the volatility, demand for borrowing has not collapsed.
In fact, the opposite behaviour is often observed during periods like this. When borrowers believe interest rates may rise in the future, they tend to accelerate financing decisions to secure current pricing. This creates a temporary surge in activity.
Businesses and homeowners seek to lock in financing before further increases occur, while lenders simultaneously reassess pricing and product availability. The result is a market where demand remains strong even as borrowing costs gradually increase.
Mortgage markets offer a useful early signal, but the same dynamics apply to commercial lending. Rising swap rates influence the cost of funding for banks and non-bank lenders alike, affecting everything from property finance to working capital facilities.
For small businesses considering borrowing later in the year, the current conditions may represent a closing window, and it may be worthwhile to reassess your borrowing plans to seek funding sooner rather than later.
What This Means for Small Businesses
For small businesses, the practical implications are significant. Many businesses postponed borrowing decisions during the peak of the interest rate cycle, expecting that financing would become cheaper once inflation subsided. That strategy may have made sense to some when the economic trajectory appeared predictable. However, geopolitical shocks have a habit of disrupting carefully constructed forecasts.
If inflation proves more persistent due to energy costs, interest rates could remain elevated for longer than expected. Even modest increases in borrowing costs can meaningfully affect repayment schedules and cash flow planning.
For example, a 0.5% increase in interest rates on a £500,000 facility over five years can add thousands of pounds in additional interest costs. For businesses operating on tight margins, those differences can affect hiring decisions, expansion plans or investment timelines.
The Strategic Opportunity for Businesses
While higher borrowing costs may appear negative, they also create opportunities for well-prepared businesses.
Companies that secure financing early gain certainty over their capital structure. They can move forward with growth plans while competitors delay investment due to uncertainty.
Access to capital during volatile periods can enable businesses to:
- invest in expansion projects
- secure inventory or supply contracts
- refinance existing debt under stable terms
- maintain stronger working capital positions
In contrast, firms that delay borrowing until conditions tighten further may face fewer funding options and stricter lending criteria.
Timing, in this environment, becomes a strategic decision.
The Cost of Waiting May Be Rising
Recent developments across global energy markets, inflation forecasts and lender behaviour are pointing in the same direction.
Interest rate expectations have shifted. Mortgage pricing has moved above 5%. Hundreds of lending products have been withdrawn, and major banks have already increased rates.
For businesses, the lesson is not to panic, but to recognise that the economic environment is changing again.
Businesses that plan ahead and secure funding while options remain plentiful may benefit from greater stability and flexibility. Those that postpone decisions may discover that the cost of borrowing has risen by the time they return to the market.
In uncertain times, the ability to act early can become a competitive advantage and is a deciding factor in businesses that grow during tough times, and companies that erode quietly and slowly due to inflation and rising costs.
Speak to Finspire Finance
Markets move quickly, preparation gives you better options.
If you're planning financing this year, starting the conversation early can be a real advantage.
Contact us today to see what options you have available to you, and to discuss financing tools that could benefit your business.
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